ECB holds interest rates at 4% after 10 back-to-back hikes

Commentators debate the likely path ahead for monetary policy


The European Central Bank (ECB) has decided to hold interest rates at 4%, ending a run of 10 consecutive rate hikes.

The decision comes in the wake of struggling labour markets in Europe, along with mediocre results for household and corporate lending data. The ECB hinted when it last convened in September that it would be the last of its rate hikes, as its main rate hit the highest level since the euro currency was launched.

The decision to hold was made at the Governing Council’s Athens meeting earlier today (26 October).

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At the meeting, the central bank stated it intends to return inflation to its target of 2% “in a timely manner”, following a data-driven approach to determine how to reach its goal. Year-on-year inflation for the Eurozone was 4.3% for September.

Marcus Brookes, chief investment officer at Quilter Investors, said: “There remain several risks that may keep inflation stubbornly high including increasing wage growth and the uncertainty in the Middle East which is pushing up energy prices.

“Going forward, like other central banks it will say the market needs to expect higher interest rates for longer, with the door being left open should we see inflation spike again. However, given the stagnating economy and the fact other central banks have moved into a holding pattern, something very unexpected would need to happen for rates to be raised again.

“The pressure will quickly shift to cutting rates given the lack of economic growth. This is the problem facing central banks now. They have successfully guided economies to this level of rates without tipping them into full-blown recessions, although Germany is experiencing one and others will have felt like they were in one.”

“So how long can rates really remain at this level before things really start to bite? If they move too early, they risk bringing inflation back into the system – but move too late and the economic impact will be significant. With geopolitical events flaring up, it isn’t very easy being a central banker right now.”

Gurpreet Gill, macro strategist of global fixed income at Goldman Sachs Asset Management added: “We believe the ECB’s hiking cycle is complete and expect today’s decision to keep rates on hold at 4% to extend into 2024. Rising energy prices present a fresh upside risk to headline inflation, but subdued growth and cooling core inflation will likely preclude further rate hikes.

“Our base case expectation is for a rate cut from the third quarter next year, though a sharp slowdown in the economy or a larger-than-expected deterioration in the labour market could prompt an earlier shift towards policy easing.”

Commenting on the decision to pause, Hetal Mehta, head of economic research at St James’s Place, also said: “Unlike the last meeting, the ECB kept rates on hold as widely expected. We’ve had a long spate of negative data surprises – including weak business sentiment – and continued progress on inflation. But there is still a while to go before the ECB will be comfortable enough to signal a cut in rates. Unemployment is still low and core inflation tends to move slowly.

“The ECB is most likely done on hiking for now but the bias will be towards a hike for a few more months.”

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